It would be easy to envy Eve her lifestyle. She has a mortgage-free home in a sought-after part of downtown Toronto, work she loves and a rental property that throws off substantial cash flow.

Eve’s world has changed over the years. At 46, she is divorced with shared custody of her two children, ages 10 and 12. The erratic income she has earned as a freelance photographer is dwindling and could disappear altogether before long. She’s worried about finding employment at her age and uncertain about what she wants to do.

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Eve sees her rental property as her pension. She has two mortgages on the property, one that will be paid off in more than 20 years, the other in about 16. Short term, she wants to pay down her $20,000 line of credit and wonders whether she should cash in her registered savings to do so. Longer term, her goal is not to have to work for a living any more.

“I don’t drive a car, don’t eat out at fancy restaurants, don’t take drugs, but play lots of squash, which costs,” she writes in an e-mail. She is apprehensive about the future. “Given that I am not keen to get a real job and don’t think anyone will want me now, how doomed am I?”

Eve wonders if she can afford to retrain for a new career and whether it would be worthwhile. “I’m working for peanuts. I love it but it’s going to run out,” she writes. “Or should I perhaps think about buying another rental property?”

Then, as if having second thoughts: “Am I in a position to have choices?” she asks. “When can I feel safe and retire?”

We asked Michael Cherney, an independent financial planner in Toronto, to look at Eve’s situation.

What the expert says

“The bad news is that Eve is going to have to make some changes now,” Mr. Cherney says. The good news is that her rental property is an “ace in the hole” for her later years. With no pension and little in the way of savings, “she would normally be looking at a difficult retirement.”

The challenge will be getting there. Loss of her precarious freelance income is only one of the risks Eve faces, the planner notes. The other is interest rate risk. Eve is paying variable rates on her two mortgages of 2.15 per cent and 2.4 per cent, rates that could rise substantially in time.

“Her current interest expense of about $8,500 a year could more than double,” Mr. Cherney says. Because she is only barely making ends meet, something will have to give.

Eve has a flexible Scotia Total Equity Plan that allows her to take out a fixed-rate mortgage to partly pay down her variable rate loans as well as her line of credit. He calculates she could switch about $70,000 of her debt from floating to fixed now at a rate of 3.5 per cent for five years. While the interest rate would be higher than she is paying now, locking in would help reduce the risk that she will pay even more in future.

Unless she can find more lucrative employment, perhaps a part-time job to supplement the creative work she loves, Eve will have to shave her expenses, Mr. Cherney says. The $330 a month she spends on sports and hobbies is a prime candidate. As well, she may be underestimating some of her costs and neglecting to build an emergency fund for unexpected property repairs and maintenance.

“This is important. If she is unable to adjust her revenues/expenses, she could end up in a crisis.”

Looking ahead, Eve has set a retirement income target of $4,500 a month in 2012 dollars before taxes. This looks achievable thanks to her rental property, the planner says – but not as soon as she had hoped. With net rental income (before tax) of about $30,000 now, Eve will have to pay off her mortgage loans first.

She will be able to retire in 20 years at age 67, at which time her net rental income will be about $38,500 in 2012 dollars. Adding $4,564 of Canada Plan Benefits and $6,481 of Old Age Security benefits, together with withdrawals from her modest registered savings, will lift her income to $54,000 a year before tax.

Should she buy another rental property?

“My advice is no, she already has almost $400,000 in debt,” the planner says. Besides, prices are so high now – “and she really has no money for a down payment” – that borrowing against her home to buy a third property, even if she could, would end up being a “net negative drain” on her cash flow, making the situation worse.

___________

The person

Eve, 46

The problem

How to compensate for her dwindling freelance income given that she has not been trained to do anything else.

The plan

Pick up a part-time job to allow her to continue with the work she loves and consider branching out into some other line of work.

The payoff

By curbing her spending and increasing her income now, she will be able to hold on to her home and her investment property, which will serve as her pension once the mortgage is paid off.

Client situation

Monthly net income

Net real estate income before income tax $2,500; average freelance income, $2,170 and falling. Net income after tax (average, variable): $3,750

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